FOMC Minutes Review: 'Tightening Financial Conditions and Short-Term Potential Growth Rate Increase'

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In the minutes of the Federal Open Market Committee (FOMC) to be released on the 22nd (local time), two key points to check for the market environment were analyzed: the tightening of financial conditions and the Federal Reserve's (Fed) assessment of whether the short-term potential growth rate is rising.

Ilhyuk Kim, a researcher at KB Securities, stated, "First, it is important to see whether the phrase 'tightening of credit conditions for households and businesses, which could burden economic activity' is revised to 'tightening of financial and credit conditions.' It is necessary to check in the minutes whether there is a willingness to maintain the intensity of financial tightening."

Earlier, Fed Chair Jerome Powell mentioned that tightening financial conditions could burden economic activity, citing rising interest rates, a strong dollar, and falling stock prices, but emphasized the need for financial conditions to remain tight. After the FOMC, interest rates fell by 50 basis points, the dollar index dropped by 3%, and the S&P 500 rose by more than 7%, significantly easing financial conditions. As economic indicators released after the FOMC have slowed, the market is not taking the recent easing of financial conditions seriously.

Researcher Kim analyzed, "Gasoline prices have reached their lowest level during the Thanksgiving period since 2020, which is likely to boost consumption. The November economic indicators, to be confirmed in early to mid-December, are expected to show a fairly solid trend."

Kim emphasized, "The Fed may be cautious about the recent easing of financial conditions. In the minutes, we need to examine the details of discussions on financial tightening to understand the criteria used to evaluate the intensity of financial tightening."

The second point to check is the "rise in short-term potential growth rate." Chair Powell maintained the existing stance at the FOMC press conference that growth below trend is necessary to reduce inflation. He also stated that although the potential growth rate has risen in the short term, recent growth has been strong but still below trend.

Kim pointed out, "Within the Fed, the view that tightening should not be strengthened solely based on strong growth is gaining traction, as inflation is gradually decreasing despite strong economic growth."

He noted, "It is likely that the Fed introduced the logic of 'rising short-term potential growth rate' to refrain from additional tightening without denying the previously understood relationship between growth and inflation. However, since this logic was presented suddenly, the market paradoxically interprets it as evidence that the Fed has little intention of further tightening."

Kim evaluated, "Unlike former Chairs Ben Bernanke or Janet Yellen, Chair Powell has shown a zigzag approach by suddenly changing or strengthening his views. The 'rising short-term potential growth rate' was one such example at the last FOMC press conference, so it is necessary to see what discussions were held regarding this in the minutes."

He added, "If this logic was discussed quite plausibly, it could counter the argument that 'the recent decline in inflation is merely a result of supply-side issues being resolved, and the recent strong growth is evidence that monetary tightening has not sufficiently curbed demand, so high-intensity monetary tightening must continue for a longer period.'"

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